Bond Market Update

Groundhog Would Be Proud

• At the risk of sounding redundant, we regret to inform you that continued selling in U.S. Treasuries on Thursday produced yet another round of fresh 2026 highs in yields on notes and bonds of all tenors. Inflation was the dominant global theme throughout the day, starting with overnight comments from Bank of Japan policymaker Masu, who said that the central bank needs to pull real rates out of negative territory, adding that accelerating inflation could force additional rate hikes. Later in the morning, the European Central Bank announced a rate hike that was widely expected, followed by the release the August PPI report for the U.S., which was essentially in-line with expectations, but it also contained upward revisions to readings from July. All this against the backdrop that featured an extension of this week's aggressive rally in WTI crude to $10/bbl after just three trading days. Treasuries started the day in the red, quickly widening their losses after this morning's data. The market remained pressured into the afternoon as crude kept building on its advance, seeing only a brief respite from a great finish to this week's note and bond auction slate. Today's strong 30-yr bond reopening briefly returned the 30-yr yield to its opening level before late pressure lifted that yield to within five basis points of its high from 2007 (5.408%). Similarly, the 10-yr yield peaked just five basis points below its highest level 2023 (4.997%) with the market growing more confident that the FOMC will announce a rate hike next week. Given this week's rally, crude oil remained in intense focus today, overshadowing copper's reversal from a record high just south of $7/lb. The red metal returned to its 50-day moving average (6.488) after concerns about affordability prompted the Trump administration to delay its decision to potentially extend duties on refined copper. Gold and silver also fell sharply today, suggesting that the market is growing concerned about the impact that rising energy prices will have on industrial demand. Oil finished the day at its highest level in nearly four months while the U.S. Dollar Index rose 0.2% to 99.03.
• Yield Check:
  • 2-yr: +12 bps to 4.55%
  • 3-yr: +13 bps to 4.65%
  • 5-yr: +12 bps to 4.73%
  • 10-yr: +11 bps to 4.94%
  • 30-yr: +8 bps to 5.36%

• News:
  • The Atlanta Fed's GDPNow forecast for Q3 GDP was lowered to 4.4% from 4.7% in the previous estimate.
  • The U.S. Treasury bought back just over $5 bln worth of debt maturing between 2037 and 2046 after receiving just over $10 bln in offers. The next buyback for these tenors is scheduled for October 1.
  • The European Central Bank raised its interest rate corridor by 25-basis points, pushing the deposit facility rate, main refinancing rate, and the marginal lending rate to their respective 2.50%, 2.65%, and 2.90%.
  • China's National Development and Reform Commission discussed its five-year plan with representatives from Amazon, NVIDIA, Dell, and many other U.S. companies.
  • British Prime Minister Burnham opened the door for another Scottish independence referendum.
  • Australia relaxed its gas reserve rules for exporters of LNG.
  • Australia's September MI Inflation Expectations remained at 4.9%.
  • Germany's final August CPI was up 0.2% m/m, as expected (last 0.8%), rising 2.9% yr/yr, as expected (last 2.9%).
  • Italy's July Industrial Production rose 0.7% m/m (expected 0.3%; last -1.1%) and was unchanged yr/yr (expected -0.6%; last -0.6%).
  • Spain's July Industrial Production rose 2.3% yr/yr (last 1.1%).
• Today's Data:
  • Total PPI was up 0.4% month-over-month in August (Briefing.com consensus 0.4%) after a revised 0.1% increase (from 0.0%) in July. Core PPI, which excludes food and energy, was up 0.2% month-over-month (Briefing.com consensus 0.3%) after increasing a revised 0.3% (from 0.2%) in July. Total PPI was up 5.4% year-over-year, up from 4.8% in July. Core PPI was up 4.6% year-over-year versus 4.3% in July.
    • The key takeaway from the report is that while the slightly cooler-than-expected core PPI was a positive sight, it was essentially masked by the upward revisions to readings for July, so this report reinforces the market's expectations for a rate hike as early as next week.
  • Initial jobless claims for the week ending September 5 decreased by 1,000 to 206,000 (Briefing.com consensus 208,000) from last week's revised total of 207,000 (from 206,000). Continuing jobless claims for the week ending August 29 also decreased by 1,000 to 1.774 million from last week's revised total of 1.775 million (from 1.779 million).
    • The key takeaway from the report is that initial claims remain locked in a narrow range right on their four-week moving average, signaling little overall change in layoff activity.
  • Existing home sales decreased 2.0% month-over-month in August to a seasonally adjusted annual rate of 3.98 million (Briefing.com consensus 4.03 million) from 4.06 million in July. Sales were down 1.2% on a year-over-year basis.
    • The key takeaway from the report is that home sales remain pressured by high mortgage rates and limited inventory, especially at the lower end. Sales of homes priced at $500,000 and below have faced the most pressure while sales of homes priced over $1 million have were up 3.9% year-over-year in August.
  • Wholesale Inventories were up 1.3% in July (Briefing.com consensus 1.3%) after increasing a revised 0.4% (from 0.2%) in June.
  • Weekly natural gas inventories increased by 40 bcf after increasing by 30 bcf a week ago.
  • Weekly crude oil inventories decreased by 391,000 barrels after decreasing by 4.45 mln barrels a week ago.
  • $22 bln 30-year Treasury bond auction results (prior 12-auction average):
    • High yield: 5.308% (4.876%).
    • Bid-to-cover: 2.61 (2.40).
    • Indirect bid: 79.5% (66.5%).
    • Direct bid: 18.3% (22.6%).
• Commodities:
  • WTI crude: +6.6% to $102.39/bbl
  • Gold: -1.2% to $4408.00/ozt
  • Copper: -4.9% to $6.55/lb
• Currencies:
  • EUR/USD: -0.2% to 1.1611
  • GBP/USD: -0.3% to 1.3510
  • USD/CNH: +0.2% to 6.7146
  • USD/JPY: +0.5% to 154.34
• The Day Ahead:
  • 8:30 ET: August CPI (Briefing.com consensus 0.4%; prior 0.1%) and Core CPI (Briefing.com consensus 0.2%; prior 0.2%) 
  • 10:00 ET: Preliminary September University of Michigan Consumer Sentiment (Briefing.com consensus 51.5; prior 51.7)
  • 14:00 ET: August Treasury Budget (Briefing.com consensus -$485.0 bln; prior -$432.3 bln)